Newell here analyzes the market difficulties that act as barriers to climate change mitigation, along with the role played by science and technology innovation in the U.S., and outlines a plan to optimize federal investments in basic and applied research. Newell’s plan is fiscal in nature; he focuses directly on the question of how federal money should best be spent. He identifies as two main barriers to climate change mitigation efforts a lack of market incentive to adopt GHG-reducing technologies and the underfunding of basic research in industry due to difficulty in recouping such long-term, public-interest investments. Accordingly, he suggests that public policy directly tackle these obstacles: a demand for such technologies must be created via a strong, comprehensive GHG tax or cap-and-trade system; industry innovation incentives need to be strengthened in the form of permanent R&D tax credits; and direct public funding for target research (at universities and in the private sector) must be increased. Newell recommends that this last investment be gradually doubled from 2007 levels by 2016—to $8 billion per year. He emphasizes that the key to his proposal is the carrot and stick approach, for “R&D push without the pull of demand is like pushing on a rope.” (6) He also notes that the market itself cannot put a price on GHG emissions; need can only be created artificially through climate policy; but that the weak private sector investment in climate-friendly technology will be substantially altered, without direct public cost, by these policy changes.

Newell also emphasizes targeting strategic, or “use-inspired” research, as opposed to pure basic research, which is decoupled from foreseeable application in the marketplace on one hand, and pure applied research on the other. He believes that the focus needs to be explicitly on research “inspired and guided by practical needs related to GHG mitigation.” (18) That is, research that is basic in nature (for this is what industry habitually underfunds) but directed at a specific set of goals. Newell also recommends implementing, through the Department of Energy, a set of industry inducement prizes (similar to the recent X-prizes). This is consistent with his call for a strategic implementation of inducements and targeted funding to address the gaps and weaknesses in private sector research, while simultaneously generating market demand through tough climate policy.